Editorial | The urgency of growth

Anyone with even a passing interest in investments and how long it will take their capital to double at a specific rate of return is likely to be aware of the Rule of 70.

It is a simple tool based in the mathematics of exponential growth and logarithm that gives a quick and reasonably accurate back-of-the-envelope answer, without resorting to complex calculations. Simply divide the annual rate of growth of the investment (or it could be something like the expansion of a country’s population) into 70 to arrive at the number of years it would take to double.

The more precise numerator, the natural log of two, is 0.693. But this figure is generally rounded to 70, for ease of calculation, leading to the widely used Rule of 70.

Why is this relevant at this time?

It is about the economic policies and strategy Prime Minister Dr Andrew Holness has to consider, and the pivots he must undertake, if he is to be really transformative in the third consecutive term in government that he and his Jamaica Labour Party (JLP) won in the September 3 general election.

For nearly half a century, Jamaica’s real annual GDP growth has averaged around one per cent. Not much is, up to now, projected to change in the medium term.

Indeed, in the current fiscal year, the target is for real GDP expansion of 2.2 per cent. Much of that is a clawing back of losses suffered from Hurricane Beryl last year. Over the next three fiscal years, after more than a dozen years of fiscal prudence and macroeconomic stability, the economy is projected to expand, in real terms, by one per cent per annum.

Which is where the application of the Rule of 70 is relevant. At its current rate of growth, it will take 70 years for the size of Jamaica’s economy to double. Which is hardly ambitious.

SIGNIFICANT IMPLICATIONS

There are significant implications in this situation. Jamaica’s long-term anaemic growth has meant that the government has lacked the revenue to invest at requisite levels in physical and social infrastructure – such as roads, drains, schools, education, healthcare, solid waste management, and so on. It shows in rutted roads, inadequate garbage collection, poor maintenance of facilities, and the inadequacy of educational outcomes.

This translates, among other ways, to an insufficiently educated and trained workforce – nearly seven in 10 employees have no formal training for the jobs they do – or workers who can’t quickly move up the technological food chain to take advantage of the emerging artificial intelligence systems that threaten jobs in the business outsourcing sector, as currently structured.

In other words, Jamaica faces the possibility, despite its macroeconomic stability, of remaining stuck in its low value-added, low-wage, low-growth trap. Indeed, the island’s record low unemployment (3.3 per cent in April) is accompanied by a long-term decline in labour and total factor productivity.

There are other consequences of the island’s low-growth (real and nominal) environment, including the relative poverty of Jamaicans compared to their Caribbean colleagues.

While Jamaica’s size (with a population of nearly three million) helps to give it CARICOM’s third largest economy (US$21.41 billion, according to the IMF) in nominal terms, it lags on a per capita basis.

According to World Bank data, Jamaica’s nominal per capita GDP is just over US$7,000. Antigua and Barbuda’s is heading towards US$24,000, while Barbados’ is over US$25,000. St Lucia’s is twice Jamaica’s. Of independent CARICOM members, only Haiti’s (US$2,142) has a lower per capita GDP than Jamaica. A skewed income distribution exacerbates this situation.

CRITICAL CONDITIONS

Among the lessons from all of this is that while Jamaica’s aggressive lowering of its debt-to-GDP ratio (from nearly 150 per cent in 2012 to under 60 per cent by the end of this fiscal year) is a critical condition for economic growth, they clearly aren’t sufficient. At least, not the kind of growth necessary for economic and social transformation.

None of this, or course, is lost on Prime Minister Holness. Late in 2024, he signalled his Government’s intention to “pivot” to growth, and provided broad strokes of things that are intended to be done.

Although encouraging, the plans were not, in this newspaper’s view, sufficiently coherent or robust to break out of what we previously alluded to as the inter-connected loops that constrain growth. Which, we insist, must be done without squandering the hard-won fiscal gains, or undermining accountability institutions, like the Independent Fiscal Commission, whose oversight helps to ensure good behaviour.

The circumstance requires new and creative thinking, lest the administration enters its third term stuck only with what was previously on the agenda, and the possibility of running out of steam. Dr Holness has to be vigilant against this.

So, given the structural shift of the economy over the last quarter of a century, in which services account for 75 per cent of output, the government, for example, has to urgently re-imagine the tourism and business process outsourcing sectors.

This demands significant allocation of resources to education and training, and the widespread introduction and engagement of AI technologies. There must be, too, a deeper integration of the tourism industry into the wider economy, to ensure domestic value-added contributions, such as via agro-processing.

These won’t just happen. They will require coordinated policies and sustained effort.